India Strategy – Market Vs Analysts

August 4, 2010

The Indian Equity market has reacted nonchalantly to a tepid earnings season, especially with the larger companies tending to disappoint on earnings. While inflation is a concern, the market seems to hold the view that the pressures will recede, and hence that India’s premium multiples will continue.

Morgan Stanley has crunched some historical data and come up with the theory of – Value at Risk. (VAR) – represents the weekly market move that has a 1% probability – i.e., the tail risk. Historical VAR can remain at low levels for many weeks before culminating in a sell-off (on an average of 65 weeks!).

While tail risk is in play, Morgan does not believe that the market is likely to sell off in a big way anytime in the near future. The market is likely to reach higher levels before such a sell-off happens. History tells us that we may have to wait another year or for another 50% rise in index levels before tail risks play out. The market has spent only six weeks so far at the current VAR level, vs. the historical average of 65 weeks.

Is the market ignoring the macro pressures on inflation and the micro pressures on profit growth, especially given the premium valuations for equities? Hence, is the market set up for a big sell-off ? What do you think ?